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Forex Currency Trading

Currency Trading Basics: Now that we understand the basics of lot sizecurrency trading online forex with anna and  pip value, we are almost ready to start forex currency trading our fx pairs - worrying! - On this page we will look in particular at how a forex currency trading account works, and how it is possible to trade large amounts of currency with such small cash deposits in our account.

Currency Trading Margin

If you have ever traded stocks or shares, then you will know that in order to buy 100 stocks at $10 each, it will cost you $1000. This is known as a cash market where real cash changes hands for real stocks. If you applied the same principles to the retail currency trading market the following would happen as shown below:

Cash Account  Leverage 1:1 i.e. a cash purchase EUR/USD Market Moves Profit/Loss on the Day
$100o Buy $1000 100 pips 0.0001 x 100 = 10 dollars

Clearly not very exciting for an experienced trader - the answer of course is margin. All currency trading accounts are leveraged so that as a trader you are able to trade meaningful contract sizes. In essence, leverage is the amount expressed as a multiple by which the notional amount traded exceeds the margin required. Professional traders suggest a maximum of 1:20, and yet most brokers will offer anything from 1:50 to a suicidal 1:400. I have even come across one broker offering 1:700 which is criminal in my view. I will talk about this in more detail when we come to the page ' Choosing Your Broker', but if you trade with anything more than a 1:50, you are asking for trouble.

If we use the same numbers again and look at a 1:50 account and a 1:400 account the figures are as follows :

Cash Account Leverage  EUR/USD Mini Contracts ( $10,000 each) Market Moves Profit/Loss on the Day
$1000 1:50 Buy $50,000 100 pips 0.0001 x 100 = $500
$1000 1:400 Buy $400,000 100 pips 0.0001 x 100 = $4000

So with our leveraged currency trading margin account of 1:50 we are now able to control 50,000 dollars in the market with only 1000 dollars in our account. If the market moved down two days in a row ( i.e.: 200 pips ), we would receive what is called a margin call ( if not before ) to cover the position and put more money into our account- ( margin is explained in more detail here ) With the 1:400 account, we would receive a margin call in the first few hours of trading! The reason most traders fail is that they do not understand the principles of leverage and margin, and more importantly the level of funding needed in these types of trading accounts to support the trades.

Currency Trade

Having opened our account we are now ready to currency trade online. Let's suppose we have a forex account at 1:50 and our FX broker offers mini contract lots of $10,000. We think the EUR/USD is going to fall and decide to sell one mini contract. We open our account on line and press the button to sell one EUR/USD mini contract. The following day the pair have fallen by 70 pips as we forecast, and we close out for a profit of $70 - very easy. Equally we could have bought, and closed out at a loss of -$70 - also very easily! So is this gambling or speculation?  It is both. In reality the market is like the wild west, full of card sharps, charlatans and snake oil salesmen. If you do not understand what you are doing, why you are doing it, or the rules of the game, then you will lose. Let me ask you a simple question - when you open a currency trade with your online broker, who do you think you are playing against? - the answer is given later in the choosing your broker page - most traders don't know the answer - is it important- YES.

Ok, that's all I propose to cover in how to open a trade and the basics of forex currency trading. It's so easy to go either long or short in any trade  - it really is child's play. Unfortunately this very simplicity belies the dangers. The remainder of the site is devoted to helping you understand the factors that influence the markets, what makes a currency move, currency correlation, hedging, and the fx brokers that you should avoid.

I'm going to start by looking at one currency from each pair in detail to give you the economic background to seven of the world's major currencies that you will be trading in your online currency trading account, as we begin trading currencies.

 

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